Should I buy a 4-plex with foundation issues?

[Elena S.]

I have a 4-plex under contract in Kentucky. Inspection revealed major issues with the property, some of which were not disclosed: evidence of foundation problem (stair-step and horizontal cracks, bowing towards the inside of the basement, uneven floors in units); basement leaks, roof leaks, 1 furnace is putting out carbon monoxide and needs to be repaired, etc. The Seller came down in price slightly and said he is not going to do any repairs. The property is in a B-class neighborhood, built in 1920s. 2 of the 4 units are rented. Property manager doesn’t think it will be a problem to fill the other 2 units once they are rent-ready. Numbers are below:

Discounted purchase price: $182,000

Rent: $2,600  ($660 and $660 for occupied units, projecting at least $640 for each vacant unit)

Mortgage: $623

Property taxes: $231

Insurance: $171

Property Management 9%: $234

Reserves 20% (repairs, CapEx, vacancies): $520

Trash bill: $50 (tenants pay all other utilities)

Cash Flow: $771

Down payment: $45,500

Closing costs: $8,000 (verified)

Repairs: $40,000

Total cash invested: $93,500

Cash on cash return: 10%.

My goal with this property is long-term hold for cash flow. I prefer cash on cash return in double digits around 15%. I have no experience with foundation repairs.

What would you do? Should I walk away? The only money I’m losing at this point is for the inspection.

[Dallas Hayden]

You may not be able to "repair" the foundation. If the basement walls are failing or collapsing, you may need to replace them! Did you get a structural engineer to check the basement walls? Based on your description (basement walls collapsing inward), only the foundation would worry me. Foundations can be relatively straightforward to fix. A single story house can often be lifted with small bottle jacks however I'd be much more worried about a 4-plex. How many stories? Is the exterior wood or brick? How deep is the basement? Clearance from the street and nearby properties?

If your intent is to buy and hold, the house has multiple stories, has brick walls, and you intend to hire a foundation repair crew, the foundation "repairs" may eat your lunch. Worst case you may need to dig out around the basement and build temporary retaining walls and building cribbing while you replace the basement walls. If you're working with limited clearance the costs may rise dramatically. Replacement may take weeks and during this time the house may be uninhabitable. 

I don't intend to scare you however I have significant foundation experience. I also don't normally say this, however I'd be VERY cautious with the foundation. You don't want a boat anchor/liability on your hands.